Australian Local Government Association vetoes bail-in laws debate

The Australian Local Government Association has prevented debate at its national general assembly beginning on Monday in Canberra on bank “bail-in" laws currently being considered by the G20 to safeguard the financial system from future crises.

Local governments are taking a more active interest in laws which may avoid a repeat of the financial crisis after several councils around the country got burned by investing in toxic derivatives before the GFC.

Earlier this month, a full bench of the Federal Court of Australia upheld an earlier win by the councils, finding that Standard & Poor’s rating of constant proportion debt obligations sold to the councils had been “unreasonable, unjustified and misleading" and that investment bank
ABN Amro
, which structured the deals, knew that to be the case.

Under guidance from the Financial Stability Board, the G20 is currently developing a policy to respond to problems of banks becoming ‘too big to fail’ and relying on taxpayer-funded bail-outs. The G20 is seeking to create a “bail-in" regime, under which bank shareholders, bondholders and potentially depositors take haircuts to resuscitate a failed bank. The rules, applying to Global-Systemically Important Banks (G-SIBs), may be presented to the G20 Leaders Summit in Brisbane in November.

The Citizens Electoral Council, a fringe Australian political party with around 25 full-time staff, has been lobbying against “bail-in" legislation and is also calling for the introduction of a Glass-Steagall-like law in Australia that would separate retail banking from investment banking activities. The CEC has been meeting with state and federal MPs – and with local governments - to push its agenda.

Even though no Australian banks have been included in the list of G-SIBs on which the G20 bail-in laws will apply, Robert Barwick, an executive member of the CEC, said in a ­global crisis, the FSB might expect ­Australia’s banks to be “bailed in" so they don’t pose a threat to the ­global economy.

Disappointment

“That, in effect, is what motivated the Cyprus bail-in: its banks weren’t G-SIBS, but their crisis threatened wider contagion in Europe," he said. “The bottom line is, until the legislation is made public, we don’t know what’s specifically planned."

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In February, one local government in Sydney, Strathfield City Council, passed a motion urging the Federal Parliament “to, instead of passing legislation enabling “bail-in", pass legislation modelled upon the US Glass-Steagall law which functioned so successfully from its passage in 1933 until its repeal in 1999, which separated commercial banking from investment banking".

Other local governments, including Beverley Shire Council in WA and Glenelg Shire Council in Victoria, have passed similar motions.

The CEC says 166 current and former councillors and mayors personally support Glass-Steagall.

In April, Strathfield asked ALGA to include the issue on the agenda for its meeting this week. But Councillor Andrew Soulos said the request would not be debated because the motion did not meet ALGA’s criteria.

“I was a bit disappointed it is not on the agenda," Mr Soulos said. “I was looking forward to seeing what other councillors had to say about it on the floor. Debate would have been healthy for local government."